E-book (and other digital product) prices may rise as VAT law kicks in

Wednesday, 29 October 2014 - 4:31am Publishers and retailers will aim to prevent e-book prices from soaring when a new European-wide VAT law on digital products is introduced on 1st January.

Following a European Commission ruling dating back to 2008, e-books and other digital services—including broadcasting and telecommunications—will be taxed in the European member state in which the consumer is located, as opposed to the country from which the product is sold.

The move prevents Amazon, Nook and Kobo from applying a low 3% tax on e-books sold to European countries, because their headquarters are in Luxembourg. Instead, the e-book retailers will have to apply the standard UK VAT rate (20%) to e-books sold into the UK. As a result, Luxembourg stands to lose around €800m a year from the ruling, while the UK and Germany stand to gain around €350m each per annum.

It also threatens to raise the price of UK e-books on Amazon, Kobo and Nook websites come January, and begs the question of who will carry the burden of the extra VAT charge those retailers will have to pay.

A HarperCollins spokesperson told The Bookseller the pricing issue was “complex”, and said “there is no one-size-fits-all solution, beyond the absolute assurance that we’re doing everything we can to minimise the impact on consumers while protecting our authors’ royalties.”

A Kobo spokesperson said: “We will continue to work closely with our publisher partners, both agency and wholesale, to bring our customers the best possible offering.”

But others have warned Amazon would face a “revolt” if it tried to make publishers pay the VAT shortfall. Alessandro Gallenzi, founder of Alma Books, said: “This isn’t a thorny issue, it’s a hornets’ nest. Who will take the hit? I don’t know. Amazon has so far been absorbing it; I doubt it’ll do the same moving forward. However, if it tried to force it on publishers there will be revolt—and Amazon knows that.”

Andrew Johnston, managing director of Quiller Publishing, said that come January, either “Amazon will cushion the rise itself—though I cannot see that happening, it will put prices up—or come to publishers and ask for extra discount . . . but I haven’t heard anything on that front yet.”

Enders analyst Douglas McCabe said he suspected price increases would be “relatively small in the medium-term” but would creep up over time, “with huge discounts still applied on a tactical basis”.

Richard Asquith, vice-president of global tax at online accounting service Avalara, expects retailers to adopt the “Ryanair-style” model of adding VAT at the till. He said: “Companies are getting much better at protecting their margins. If they don’t increase prices on 1st January they will do it soon [after]. Otherwise it’s a huge dent in their business model. It’s inevitable that it will come.”

Another aspect of the new law is the logistical challenge faced by retailers who sell e-books abroad—and publishers who sell direct to consumers—of paying different VAT charges in different countries in Europe. To simplify the process, the UK has set up a Mini One Stop Shop (MOSS) system, which opened for registration on Monday (20th October) and enables publishers and retailers to pay just one return and payment (see column, right).

The Publishers Association and the IPG have been working with HMRC and tax advisers to run training sessions preparing members for the new law. HarperCollins’ spokesperson said it had “put processes in place and is confident it can manage the change”, while Lara Borlenghi, finance director at Pan Macmillan, confirmed the company had been planning for the changes “for some time”.

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